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Monday, May 21, 2012

The inevitable result of increased complexity and profit

As real profit margins sink and the full effect of peak oil kicks in, these are the sorts of stories there will be an increasing amount of. The only way to maintain the illusion of growth is constant "cost cutting", and fake parts, cheap parts, malfunctioning parts, etc are a big part of this cost-cutting endeavor. It is this convergence of cost-cutting and increasing energy complexity which is never mentioned in the context of what's possible to address the world's many problems.

Namely this applies to those who subscribe to the "Daniel Yergin" school of thought. Yergin refers to our energy predicament not as an "energy crisis" but rather as an "energy opportuntiy". He neglects that for every major discovery due to human ingenuity there is an equal or greater fuck-up due to human error. Major catastrophe doesn't come out of simple processes however, it comes from highly complex processes of which a great many people rely.

It can take years of painstakingly expensive research to come up with a true solution, on the contrary it only takes a few seconds of relative absent-mindedness to blow that solution up. It gets worse when reviews such as quality-control are first on the chopping block.

The number one argument I get most often to the sort of issues I write about and the point-of-view I take is that there are possible solutions, if only society would do them. I'm often told that peak oil isn't really a problem because there is plenty of alternatives to oil. Let's for the moment nevermind that most oil alternatives are in fact derivatives, let's focus on the solution touted itself in the context of increased complexity, cost-cutting, and geo-political instability.

First, I will say - yes, there are "alternatives" - or at least a means to responsibly use the remaining oil for the foreseeable future. To make use of these alternatives quickly the remaining oil reserves would pretty well need to be completely invested in to the alternatives with no real promise of a return. If the world's only problem was energy, all countries were "friends" and energy wasn't as secretive an industry as it is then maybe we could look at this as an energy opportunity. If there were not 7 billion people whose daily lives are affected by the current cost of energy, then yes, also, it would be an energy opportunity. If there was nothing to lose, it would be an opportunity, but we have everything to lose and that's why it's a crisis.

This is I think where most energy-economics analysts go awry. They forget that people depend on energy in their every day lives. Well, not really forget, they will point to statistics about how many people can still afford energy, showing no significant drop. But there is a drop, that's what is important here. We're on a long-term downward spiral. As things deteriorate, the bar of what is "acceptable poverty" continues to lower and the number of people which meet this bar continues to increase. The long-term trend is that slowly, fewer and fewer people can afford their daily lives. At the same time the real profit margin in businesses is getting smaller due to the increase in energy costs, causing increasing externalization of costs.

If you look at energy solutions touted for the future, they are all extremely complex, involving many processes and parts. Whether it's deepsea drilling, fracking, oilsands, or even solar and wind - these energy solutions all require a complex and organized supply chain, pipelines, upgraders, metallurgy, etc. It's why the U.S. is providing drones to Iraq to defend the oil supplies there. With increased complexity, strained supply chains, comes increased cost. For instance, the Globe and Mail had an appropriately titled article "The age of extreme oil":

Alberta's oil sands are the obvious example: Here, on average, two tonnes of earth must be strip-mined and seven barrels of water heated to steam in order to produce a barrel of oil. It takes a barrel's worth of energy to produce just three barrels of oil; 30 years ago it would have been 100.

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Extreme energy (Source: circleofblue.org)

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That is a cost increase of 3:1 from 100:1. When looking at energy, the dollar value doesn't mean a whole lot, this is why Alberta is now chasing $140 / barrel oil. Alberta has attached a meaning to the dollar value of oil instead of looking at the ratio of input cost versus surplus energy produced. This means that if in the future we are going to look to oilsand or other "extreme" forms of energy, what used to cost 1cent on the dollar, will now cost about 33.3cents. It doesn't take a geologist or an economist to figure out that profit margins are significantly slimmer today.

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Back in the day (Source: fineartamerica.com)

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Getting back to the complexity issue, what used to be a simple process that anyone could do with an ancient wooden contraption, it now takes vast campanies with billions in risk to accomplish.﻿﻿﻿﻿

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You can see the energy input requirments for energy have changed drastically, and keep in mind that today's society is still running of the fumes of the cheap energy era. It's only recently that the true cost of energy is starting to impact people and the results are not very promising nor bold well for future prosperity (in terms of what we've come to know as prosperity).

On top of this huge increase in input costs, comes the huge increase in complexity as well. Extreme energy relies on a global supply chain, components and drill bits manufactured in pieces all over the world, then shipped (using a lot of energy) to the remote locations they're needed. The old derricks you could essentially build out of the trees in your backyard, literally. This is how oil discovery in the U.S. started in the first place.

So what happens if the Strait of Hormuz is cut off? What happens if the complex supply chain that keeps our energy production moving is interrupted? Gone are the days of backyard energy production, what do we do then? We've been very close already, from Fukushima to diesel shortages. One of our major problems is the increasing complexity of which requires more drastic measures touted as a solution each time. To truly address the problems we are going to have to lower our expectations and adjust accordingly.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.